IT Industry Group, ITAC, Wants Changes to SR&ED

Information Technology Association of Canada calls for changes
to the SR&ED program to help startups scale.

The Information Technology Association of Canada (ITAC),1 a national information and communications technology (ICT) business association, is looking ahead to the federal government’s 2018 Budget by outlining 24 recommendations in nine core areas. SR&ED is one of those areas and the group hopes that the government will innovate the SR&ED program by making “tweaks” to it.

Their recommendations include rewarding successful innovation by reducing the “grind down” for growing companies. “Grind down”, according to an editorial penned by Ross Video CEO David Ross recently in the Globe & Mail,2 is “a mechanism in the SR&ED program that decreases the cash returned to companies as they grow or become mildly profitable.”

While this mechanism was put in place “to spark innovation and startups,” according to Ross, ITAC echoes his concern that Canada does not have an innovation problem, but, rather, “a commercialization of innovation problem” as a result of this grind down mechanism.

As ITAC’s 2018 Pre-Budget Submission 3 to the federal government notes, “SR&ED is highly successful at supporting start-ups, but less effective at helping our small companies scale to middle- and large-sized businesses. The reason for this is that SR&ED can inadvertently incentivize companies to stay small by scaling back the credits as companies grow and reach commercial success.”

To that end, ITAC offers the following “potential options” to mitigate against this in their pre-budget submission:

A company would need to demonstrate that a high percentage of its revenue is generated from exports to qualify for the SR&ED tax credit.

A higher threshold for taxable income in the SR&ED expenditure limits needs to be put in place by the federal government.

The threshold for taxable capital in the SR&ED expenditure limit needs to be removed as innovative companies need access to capital.

Other Recommendations

ITAC also had other recommendations to the federal government surrounding SR&ED in their pre-budget submission. They want the Liberal federal government to:

Encourage collaborative innovation by allowing large firms to access a portion of unused SR&ED credits to fund collaborative R&D with small to medium-sized businesses (SMEs) in Canada. This would provide increased risk capital for growing companies while providing SMEs with access to global supply chains.

Encourage SMEs to grow through mergers and acquisitions to create larger, more globally competitive business by creating a three to five year “SR&ED Holiday,” where the merged company could still access SR&ED credits at the rates previously available to the smaller companies.

Improve SR&ED administration for the ICT industry by making SR&ED accountability requirements and timelines more flexible to support innovative sectors with more continuous R&D cycles, like software development.

ITAC’s ultimate recommendation in their submission is for the Department of Finance Canada and Department of Innovation, Science and Economic Development Canada to work with ICT industry experts to advance adjustments to SR&ED that would be more beneficial to the industry.

Why is ITAC Recommending This?

The rationale behind these recommendations is simple: ITAC says that if start-ups and smaller businesses can use SR&ED tax credits to grow or scale and be encouraged to export their products or services, then the net result will be more jobs created in Canada.

ITAC has been meeting with government officials for the past year to advance their agenda in the hopes that its members will be able to innovate to export and grow, get more value from taxpayer dollars invested in R&D and increase access to risk capital.

Will ITAC Be Successful?

While it is hard to predict what the federal government will do next year, ITAC does have a good track record so far in making recommendations to the government. According to IT World Canada’s article, 9 suggestions from ITAC for the 2018 Canadian budget 4 notes, ITAC provided the federal government with 28 recommendations last year and many of them were addressed.